MIDTERM EXAMINATION Spring 2010 MGT201- Financial Management (Session - 5) Time: 60 min Marks: 44 Question No: 1 ( Marks: 1 ) - Please

choose one Which of the following statements is correct for a sole proprietorship? The sole proprietor has limited liability The sole proprietor can easily dispose of their ownership position relative to a shareholder in a corporation The sole proprietorship can be created more quickly than a corporation The owner of a sole proprietorship faces double taxation unlike the partners in a partnership Question No: 2 ( Marks: 1 ) - Please choose one Which of the following market refers to the market for relatively long-term financial instruments? Secondary market Primary market Money market Capital market Question No: 3 ( Marks: 1 ) - Please choose one Felton Farm Supplies, Inc., has an 8 percent return on total assets of Rs.300,000 and a net profit margin of 5 percent. What are its sales? 750,0Rs.3, 750,000 Rs.48Rs.480, 000 Rs.30Rs.300, 000 Rs.1, Rs.1, 500,000 Question No: 4 ( Marks: 1 ) - Please choose one An investment proposal should be judged in whether or not it provides: A return equal to the return require by the investor A return more than required by investor A return less than required by investor A return equal to or more than required by investor Question No: 5 ( Marks: 1 ) - Please choose one A capital budgeting technique through which discount rate equates the present value of the future net cash flows from an investment project with the projects initial cash outflow is known as: Payback period Internal rate of return

 Net present value Profitability index Question No: 6 ( Marks: 1 ) - Please choose one A capital budgeting technique that is NOT considered as discounted cash flow method is: Payback period Internal rate of return Net present value Profitability index

Question No: 7 ( Marks: 1 ) - Please choose one Why net present value is the most important criteria for selecting the project in capital budgeting? Because it has a direct link with the shareholders dividends maximization Because it has direct link with shareholders wealth maximization Because it helps in quick judgment regarding the investment in real assets Because we have a simple formula to calculate the cash flows Question No: 8 ( Marks: 1 ) - Please choose one You are selecting a project from a mix of projects, what would be your first selection in descending order to give yourself the best chance to add most to the firm value, when operating under a single-period capital-rationing constraint? Profitability index (PI) Net present value (NPV) Internal rate of return (IRR) Payback period (PBP) Question No: 9 ( Marks: 1 ) - Please choose one Bond is a type of Direct Claim Security whose value is NOT secured by __________. Tangible assets Intangible assets Fixed assets Real assets

Question No: 10 ( Marks: 1 ) - Please choose one If a 7% coupon bond is trading for Rs. 975 it has a current yield of _________ percent. 7.00 6.53

 8.53 7.18 Question No: 11 ( Marks: 1 ) - Please choose one Which of the following is designated by the individual investor's optimal portfolio? The point of tangency with the opportunity set and the capital allocation line The point of highest reward to variability ratio in the opportunity set The point of tangency with the indifference curve and the capital allocation line The point of the highest reward to variability ratio in the indifference curve Question No: 12 ( Marks: 1 ) - Please choose one Assume that the expected returns of the portfolios are the same but their standard deviations are given in the options given below, which of the option represent the most risky portfolio according to standard deviation? 1.5% 2.0% 3.0% 4.0%

Question No: 13 ( Marks: 1 ) - Please choose one Which of the following is a drawback of percentage of sales method? It is a rough approximation There is change in fixed asset during the forecasted period Lumpy assets are not taken into account All of the given options

Question No: 14 ( Marks: 1 ) - Please choose one Which of the following need to be excluded while we calculate the incremental cash flows? Depreciation Sunk cost Opportunity cost Non-cash item

Question No: 15 ( Marks: 1 ) - Please choose one Which of the following is NOT an example of a financial intermediary? Wisconsin S&L, a savings and loan association Strong Capital Appreciation, a mutual fund Microsoft Corporation, a software firm College Credit, a credit union Question No: 16 ( Marks: 1 ) - Please choose one

An 8% coupon Treasury note pays interest on May 30 and November 30 and is traded for settlement on August 15. What is the accrued interest on Rs. 100,000 face value of this note? Rs. 491.80 Rs. 800.00 Rs. 983.61 Rs. 1,661.20 ( Marks: 1 ) - Please choose one

Question No: 17

A preferred stock will pay a dividend of Rs. 3.50 in the upcoming year, and every year thereafter, i.e., dividends are not expected to grow. You require a return of 11% on this stock. Use the constant growth model to calculate the intrinsic value of this preferred stock. Rs. 0.39 Rs. 0.56 Rs. 31.82 Rs. 56.25

Question No: 18 ( Marks: 1 ) - Please choose one Information that goes into __________ can be used to prepare __________. A forecast balance sheet; a forecast income statement Forecast financial statements; a cash budget Cash budget; forecast financial statements A forecast income statement; a cash budget Question No: 19 ( Marks: 1 ) - Please choose one What is the present value of Rs.8,000 to be paid at the end of three years if the interest rate is 11% compounded annually? Rs.5,850 Rs.4,872 Rs.6,725 Rs.1,842 Question No: 20 ( Marks: 1 ) - Please choose one Do not compare apples with oranges is the concept in: Discounting and Net present value Risk & return Insurance management Time value of money Question No: 21 ( Marks: 1 ) - Please choose one Which of the following is NOT the interest rate used for discounting calculation? Benchmark interest rate Effective interest rate

 Periodic interest rate Nominal interest rate Question No: 22 ( Marks: 1 ) - Please choose one Which of the following is the formula to calculate the future value of perpetuity? Constant cash flows interest rate Constant cash flows / interest rate Constant cash flows + Constant cash flows interest rate Constant cash flows - Constant cash flows/ interest rate Question No: 23 ( Marks: 1 ) - Please choose one Which of the following interest rate keeps on moving and changing on daily basis? Book value Market value Salvage value Face value Question No: 24 ( Marks: 1 ) - Please choose one From which of the following formula we can calculate coupon rate? Coupon receipt / market value Coupon receipt / present value Coupon receipt / salvage value Coupon receipt / book value Question No: 25 ( Marks: 1 ) - Please choose one Value of g in the formula of constant growth rate can be calculated from which of the following formula? g = plowback ratio ROE g = plowback ratio ROA g = payout ratio + ROE g = payout ratio + ROA Question No: 26 ( Marks: 1 ) - Please choose one In Gordons formula (rCE = DIV1 / Po + g), rCE is considered as __________ and g is considered as __________. Dividend yield, operating expenses Dividend yield, operating income Dividend yield, capital loss Dividend yield, capital gain Question No: 27 ( Marks: 1 ) - Please choose one To calculate the annual rate of return for an investment, we require which of the following(s)? The income created The gain or loss in value The original value at the beginning of the year

 All of the given options Question No: 28 ( Marks: 1 ) - Please choose one This is an example of which of the following? Real estate prices fell across the board because the market was glutted with surplus pre-owned homes for sale. Economic risk Industry risk Company risk Market risk Question No: 29 ( Marks: 3 ) Briefly explain what call provision is and in which case companies use this option. Question No: 30 ( Marks: 3 ) There are two stocks in the portfolio of Mr. N, Stock A and Stock B. the information of this portfolio is as follows: Common stock Expected rate of return Standard deviation Stock A 15% 10% Stock B 20% 15% Calculate the expected rate of return on this portfolio assuming that Stock A consists of 75% of the total funds invested in the stocks and the remainder in Stock B. Question No: 31 ( Marks: 5 ) (a) What is correlation of coefficient? (b) What are efficient portfolios? Question No: 32 ( Marks: 5 ) Suppose you approach a bank for getting loan. And the bank offers to lend you Rs.1, 000,000 and you sign a bond paper. The bank asks you to issue a bond in their favor on the following terms required by the bank: Par Value = Rs 1, 000,000, Maturity = 3 years Coupon Rate = 15% p.a, Security = Machinery You are required to calculate the cash flow of the bank which you will pay every month as well as the present value of this option.